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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2004.

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from _______________to_______________.

Commission File Number 0-23212

Telular Corporation
(Exact name of Registrant as specified in its charter)

647 North Lakeview Parkway
Vernon Hills, Illinois
60061
(Address of principal executive offices)
(Zip Code)

(847) 247-9400
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  X                                             No     

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  X                                             No     

The number of shares outstanding of the Registrant’s common stock, par value $0.01, as of June 30, 2004, the latest practicable date, was 13,224,220 shares.

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TELULAR CORPORATION
Index

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TELULAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)

See accompanying notes

3

TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)

See accompanying notes

4

TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share data)
(Unaudited)

See accompanying notes

5

TELULAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)

See accompanying notes

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TELULAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

See accompanying notes

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TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited, dollars in thousands, except share data)

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TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited, dollars in thousands, except share data)

9

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited, dollars in thousands, except share data)

10

TELULAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited, dollars in thousands, except share data)

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Overview

The Company designs, develops, manufactures and markets products based on its proprietary interface technologies. These products provide the capability to connect standard telecommunications equipment, including standard telephones, fax machines, data modems and alarm panels with wireless communication networks in the cellular and PCS frequency bands (collectively cellular). Bridging the gap between wireline customer premises equipment and cellular networks, these technologies provide the Company’s products with the “look and feel” of the wireline network, providing critical communications and security needs in a variety of environments. The Company’s business segments are divided between its two principal product lines: PHONECELL®, a line of cellular Fixed Wireless Terminals and cellular Fixed Wireless Desktop Phones (collectively Fixed Wireless Terminals or FWTs), and TELGUARD®, a line of Wireless Security Products.

Fundamental to the Company’s continued success is a strategy encompassing strong investment in technology, product design, and applications development. The Company is committed to delivering solutions for today’s networks, while investing in technology advancements for the constantly evolving wireless arena.

The growth of the FWT business in any market is dependent to a considerable extent upon the growth of cellular telephone service in that market as a cost-effective alternative to or substitute for landline telephone systems. Consequently, in managing the business and making decisions about where to invest resources, the Company’s management collects data and follows trends in the following areas of the cellular industry:

Based upon trends noted from data collected in the above areas, such as improved economic conditions in Latin America and Local Number Portability in the USA, the Company believes that the market for cellular FWTs will experience substantial growth over the next five years. Consistent with that expectation, sales of the Company’s products rose from $12.1 million for the third quarter of fiscal year 2003 to $16.4 million for the third quarter of fiscal year 2004. The Company has identified significant growth opportunities in Africa, Brazil, China, Europe, India, Mexico, Venezuela and the USA. Each of these markets will develop at a different pace, and the sales cycle for these regions is likely to be several months or quarters.

In China and India, the Company is currently facing competition at prices that are reducing the price at which the Company can sell its products to levels significantly lower than the Company’s historical gross margins for business in those countries, and potentially to levels at which such sales are not economical for the Company. The Company is pursuing efforts to reduce its per-unit costs and exploring partnership arrangements in an effort to respond to these competitive conditions.

Over the last year, the Company has been pursuing a large security business market opportunity in the USA, with a large wireless carrier and a prospective partner in the security business. The Company has recently learned that the business relationship between the prospective partner and the wireless carrier may not develop as necessary for the Company to participate in the market opportunity. The Company is continuing to seek this and other opportunities to expand its security business.

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The Company generates most of its revenue by making and selling products. It recognizes revenue when its products ship from various manufacturing locations to customers. The Company tracks its revenue in two business segments: Fixed Wireless Terminals and Wireless Security Products.

Although the Company has a broad base of customers worldwide, much of its revenue is generated from large contracts, the timing of which is often unpredictable.

The Company’s operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company’s operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements attached as Exhibit 99 to the Company’s Form 10-K for the fiscal year ended September 30, 2003.

Results of Operations

Third quarter fiscal year 2004 compared to third quarter fiscal year 2003

Revenue. Total revenue of $16.4 million for the three months ended June 30, 2004, increased 35% compared to the same period last year. Sales of PHONECELL^® products increased 45%, or $4.0 million, to $13.0 million during the third quarter of fiscal year 2004 compared to the same period of fiscal year 2003. This increase was primarily the result of improved shipments of PHONECELL^® products to customers in El Salvador, Guatemala and Venezuela. Further, sales of TELGUARD^® products during the third quarter of fiscal year 2004 of $3.4 million increased 9% compared to the same period last year.

Gross margin. Gross margin increased 35%, or $1.2 million, for the third quarter of fiscal year 2004 compared to the third quarter of fiscal year 2003. Gross margin for the three months ended June 30, 2004 of $4.7 million, or 29% of total revenue, compares to $3.5 million, or 29% of total revenue, for the same period last year. The increase in gross margin during the third quarter of fiscal year 2004 is the result of the increase in revenue.

Net income (loss). The Company recorded net loss of ($0.5) million for the third quarter of fiscal year 2004 compared to net loss of ($1.8) million for the third quarter of fiscal year 2003. Net loss in the third quarter from the Fixed Wireless segment of ($0.7) million compares to net loss of ($1.5) million last year. The improvement is primarily the result of the higher sales volume. Net income in the third quarter from the Wireless Security Products segment of $0.2 million compares to net loss of ($0.3) million last year. The improvement is primarily the result of increased revenue, cost reductions negotiated with suppliers and lower operating expenses.

Net loss per Common Share. Net loss per share of ($0.04) for the third quarter of fiscal year 2004 compares to net loss per share of ($0.14) for the third quarter of fiscal year 2003. The improvement is the result of increased sales volume.

First nine months fiscal year 2004 compared to first nine months fiscal year 2003

Revenue. Total revenue of $57.4 million for the first nine months of fiscal year 2004 increased 11%, or $5.7 million compared to the same period last year. Sales of PHONECELL^® products increased 12%, or $5.1 million, to $47.3 million during the first nine months of fiscal year 2004 compared to the same period of fiscal year 2003. This increase was primarily the result of increased shipments to customers in El Salvador, Guatemala and Venezuela, which were partially offset by decreased desktop phone shipments to Mexico. Further, sales of TELGUARD^® products during the first nine months of fiscal year 2004 of $10.0 million increased 6% compared to the same period last year.

Gross margin. Gross margin increased 3%, or $0.4 million, for the first nine months of fiscal year 2004 compared to the first nine months of fiscal year 2003. Gross margin for the nine months ended June 30, 2004 of $15.5 million, or 27% of total revenue, compares to $15.1 million, or 29% of total revenue, for the same period last year. The increase in the dollar amount of gross margin is the result of the increase in revenue. The decrease in gross margin as a percentage of total revenue during the first nine months of fiscal year 2004 compared to the same period last year is

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the result of the Company forward pricing certain Code Division Multiple Access (CDMA) products. This forward pricing occurred primarily during the first six months of fiscal year 2004.

Selling and marketing expenses. Selling and marketing expenses of $7.3 million for the first nine months of fiscal year 2004, increased 16%, or $1.0 million compared to the same period of fiscal year 2003. The increase is due to additional Latin American and domestic market development activity.

Net loss. The Company recorded a net loss of ($1.2) million for the first nine months of fiscal year 2004 compared to a net loss of ($0.7) million for the first nine months of fiscal year 2003. A net loss in the first nine months from the Fixed Wireless segment of ($1.1) million compares to net income of $0.4 million last year. The decrease is primarily the result of the lower gross margin and higher operating expenses this year. A net loss in the first nine months from the Wireless Security Products segment of ($0.1) million compares to net loss of ($1.1) million last year. The improvement is the result of higher sales volume, cost reductions negotiated with suppliers and lower operating expenses all during this year.

Net loss per Common Share. Net loss per share of ($0.09) for the first nine months of fiscal year 2004 compares to net loss per share of ($0.05) for the first nine months of fiscal year 2003. The decrease is primarily the result of the lower gross margin and increased operating expenses.

Financial Position

Because the Company is actively working to secure very large contracts, it is necessary for the Company to maintain the capability to deliver large volumes of product with relatively short lead times. Consequently, the Company has significant cash reserves, which it also uses to fund operating losses, working capital needs, and capital expenditures. The Company expects accounts receivable and inventory to return to cash in a relatively short period of time. Management regularly reviews net working capital in addition to cash to determine if it has enough cash to operate the business. On June 30, 2004, the Company had $22.3 million in cash and cash equivalents with a working capital surplus of $35.9 million.

The Company used $2.4 million of cash in operations during the first nine months of fiscal year 2004 compared to cash used of $2.7 million during the same period of fiscal year 2003. The cash used in operations during the first nine months of fiscal year 2004 consisted primarily of a $3.0 million increase in accounts receivable. The increase in accounts receivable is primarily the result of increased sales volume, which included increased open account sales to customers in North America and South America (see Item 3 below for a discussion about credit risks).

The Fixed Wireless segment used $2.5 million of cash in operations during the first nine months of fiscal year 2004, while the Wireless Security Products segment generated $0.1 million of cash in operations. During the first nine months of fiscal year 2003, the Fixed Wireless segment used $1.8 million of cash in operations, and the Wireless Security Products segment used $0.9 million of cash in operations.

Cash used in investing activities of $0.8 million during the first nine months of fiscal year 2004 compares to cash provided by investing activities of $0.4 million during the same period of the prior year. The investing activities during the first nine months of fiscal year 2004 include capital spending for product testing equipment of $0.8 million compared to $1.4 million for the same period of fiscal year 2003. The amount of cash used in investing activities for the first nine months of fiscal year 2003 includes a $2.0 million use of cash for the acquisition of licenses and technology. The first nine months of fiscal year 2003 investing activities also included a $3.8 million decrease in restricted cash, which was used to repay the Company’s revolving line of credit (offset by the same amount of cash from financing activities).

Cash provided by financing activities of $1.7 million during the first nine months of fiscal year 2004 compares to $4.3 million of cash used in financing activities during the same period of fiscal year 2003. Stock option exercises constitute all of the cash provided by financing activities for the first nine months of fiscal year 2004. The fiscal year 2003 amount consists primarily of $3.8 million used to repay the Company’s revolving line of credit (offset by the same amount of restricted cash from investing activities). The Company also used $0.6 million in cash for the

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purchase of treasury stock during the first nine months of fiscal year 2003.

Based upon its current operating plan, the Company believes its existing capital resources will enable it to maintain its current and planned operations. Cash requirements may vary and are difficult to predict given the nature of the developing markets targeted by the Company. The Company expects to maintain significant levels of cash reserves, which are required to undertake major product development initiatives, expand marketing and sales development worldwide and qualify for large sales opportunities.

To mitigate the effects of currency fluctuations on the Company’s results of operations, the Company conducts all of its international transactions in U.S. dollars.

Critical Accounting Policies

The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. The Company believes that the following represent the critical accounting policies that currently affect the presentation of the Company’s financial condition and results of operations

Reserve for Obsolescence

Significant management judgment is required to determine the reserve for obsolete or excess inventory. The Company currently considers inventory quantities greater than a one-year supply, based on current year activity, as well as any additional specifically identified inventory, to be excess. The Company provides reserves for those inventories considered as excess. The Company also provides reserves for the total value of inventories that are determined to be obsolete based on criteria such as customer demand and changing technologies. The inventory reserves were $0.9 million at both June 30, 2004 and September 30, 2003. Changes in strategic direction, such as discontinuance or expansion of product lines, changes in technology or changes in market conditions, could result in significant changes in required reserves.

Goodwill

The Company evaluates the fair value and recoverability of the goodwill of each of its business segments whenever events or changes in circumstances indicate the carrying value of the asset may not be recoverable or at least annually. In determining fair value and recoverability, the Company makes projections regarding future cash flows. These projections are based on assumptions and estimates of growth rates for the related business segment, anticipated future economic conditions, the assignment of discount rates relative to risk associated with companies in similar industries and estimates of terminal values. An impairment loss is assessed and recognized in operating earnings when the fair value of the asset is less than its carrying amount.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Currently, the Company has significant deferred tax assets principally related to net operating losses. Deferred tax assets are reviewed regularly for recoverability and when necessary valuation allowances are established based on historical tax losses, projected future taxable income, and expected timing of reversals of existing temporary differences. Valuation allowances have been provided for all deferred tax assets, as management makes assessments about the realizability of such deferred tax assets. Changes in the Company’s expectations could result in significant adjustments to the valuation allowances, which would significantly impact the Company’s results of operations.

Forward Looking Information

Please be advised that some of the information in this filing presents the Company’s intentions, beliefs, judgments and expectations of the future and are forward-looking statements. It is important to note that the Company’s actual results

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could differ materially from these forward looking statements. For example, there are a number of uncertainties as to the degree and duration of the revenue momentum, which could impact the Company’s ability to be profitable as lower sales may likely result in lower margins. In addition, product development expenditures, which are expected to benefit future periods, are likely to have a negative impact on near term earnings. Other risks and uncertainties, which are discussed in Exhibit 99 to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2003, include the following risks: that technological change will render the Company’s technology obsolete, that the Company may be unable to protect intellectual property rights in its products, that unfavorable economic conditions could lead to lower product sales, that litigation could have a material adverse effect on the Company’s financial position and results of operations, that the Company may be unable to develop new products, that the Company is dependent on suppliers and contractors, that the Company may be unable to maintain quality control, that the developing markets in which the Company conducts business are more volatile and unstable than domestic markets, that the Company is dependent on research and development, that the Company faces the uncertainty of additional funding, that stockholders may experience dilution of ownership interests resulting from financing activities, that the Company’s Common Stock price is volatile, that the Company faces intense competition within its industry, including competition from its licensees and new market entrants with cellular phone docking station products and that the development of wireless service is generally uncertain.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company frequently invests available cash and cash equivalents in short term instruments such as certificates of deposit, commercial paper and money market accounts. Although the rate of interest paid on such investments may fluctuate over time, each of the Company’s investments is made at a fixed interest rate over the duration of the investment. All of these investments have maturities of less than 90 days. The Company believes its exposure to market risk fluctuations for these investments is not material as of June 30, 2004.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. To reduce its exposure to the credit risks of international customers, with the exception of customers with ownership interests by credit-worthy US-based companies, the Company generally receives payment prior to shipment, receives irrevocable letters of credit that are confirmed by U.S. banks, or purchases commercial credit insurance. The Company performs ongoing credit evaluations and charges amounts to operations when they are determined to be uncollectible.

Item 4.    CONTROLS AND PROCEDURES

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. As of the end of the period covered by this report an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports with the Securities and Exchange Commission.

During the quarter ended June 30, 2004, there were no changes in the Company’s internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15, each promulgated under the Exchange Act that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.   LEGAL PROCEEDINGS

The Company is involved in legal proceedings that arose in the ordinary course of its business. While any litigation contains an element of uncertainty, management believes that the outcome of all pending legal proceedings will not have a material adverse effect on the Company’s consolidated results of operation or financial position. However, because of the nature and inherent uncertainties of litigation, should the outcome of any legal actions be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on the Company’s financial position and results of operations.

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Item 6.    EXHIBITS AND REPORTS ON FORM 8-K

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

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Exhibit Index

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